"There's no compelling reason to tighten monetary policy," the billionaire said on "Squawk Box." "The Fed's assumptions in terms of how employment rates would lead to inflation were clearly wrong. They don't understand that. What is the problem?"

Dalio believes the Fed won't unwind its $4.5 trillion balance sheet, or portfolio of assets, as quickly as current expectations. The central bank is expected to take nearly 4½ years to get down to around $2.5 trillion.

Reducing the balance sheet is viewed as a slight negative for economic growth, a bit worse for stocks. Overall, however, expectations are for only modestly negative effects.

The Fed began its two-day September meeting Tuesday. When the gathering ends, central bankers are expected to announce the beginning of the unwinding of the balance sheet.

A third rate hike this year is not expected this month, while the market odds for a December increase are about 56 percent, according to the CME FedWatch tool. CNBC's Fed Survey of 42 Wall Streeters found that 76 percent believe the Fed will raise rates in December.

Fed finds itself in a precarious position

Dalio said the Fed finds itself in a precarious position because there are parallels between the current economic environment and 1937, when the Great Depression intensified.

The market crash of 1929 was precipitated by a debt crisis, just as the 2008 financial crisis, which caused stocks to plummet, he said.

"Interest rates hit zero [back in 1929]. And then the central banks buy a lot of assets, expand their balance sheets, print a lot of money to make up for credit. We have a rebound from '32 to '37. And the markets go to highs and everything is good," Dalio said. But in 1937, he added, there was a tightening and the wealth gap "was analogous" to today. "It's a delicate period time [now]."

Dalio said he's not predicting that history will repeat itself. "My point isn't that that is going to happen," he said, while stressing the Fed just needs to be "cautious."

How an 'idea meritocracy' helps beat the market

The hedge fund manager also addressed the unusual corporate culture of an "idea meritocracy" at Bridgewater, saying it helps bet correctly against the consensus opinion in the markets.

Collective thinking works, Dalio said. Getting everyone on the same page is key but it must come through testing theories for why they might be wrong, he added.

Decision-making at Bridgewater is data driven, Dalio said. He described his practice of analyzing situations and writing down the criteria around them, saying he wants to be able to lean on tangible past experience when the same types of situations present themselves.

Last week, at the CNBC-Institutional Investor Delivering Alpha conference, Dalio said, "the greatest tragedy of mankind — or one of them — is that people needlessly hold wrong opinions in their minds."

Bridgewater, the world's largest hedge fund with about $162 billion assets under management, is known for strong returns and an unusual corporate culture in which employees rate one another's credibility on a number of dimensions, and everyone can see the ratings. Votes by employees with higher believability ratings are given greater weight in decision-making.

Dalio started Bridgewater out of his two-bedroom apartment in New York in 1975. His ascent to becoming a titan of Wall Street was not without setbacks, however, as he describes in his new book, "Principles: Life and Work."

Dalio wrote about how he actually went broke eight years after he started Bridgewater, but he said the experience was "one of the best things that ever happened to me because it gave me the humility."

Bridgewater's Pure Alpha II fund has had an 11.9 percent annualized return since its inception in 1991. So far, in 2017, it's down 2.5 percent.

The All-Weather fund, designed to perform in all market conditions, is up 8.5 percent in 2017. It has had an 8.1 percent annualized return since it started in 1996.

In March, Dalio completed a seven-year management transition, stepping down as co-CEO. The 68-year-old remained chairman and kept his role as co-chief investment officer.